Look beyond U.S. borders for reason in the uptick in dairy markets

No quicker did we forecast a drop in milk prices in early January, than the price of all dairy products shot through the roof.

The funny thing is that nobody had anticipated this price surge — not the USDA, not the futures market, not even yours truly. So why were so many people so blatantly wrong? And why so many more will be wrong again in the future? Nothing that happened within our borders can explain this sudden change.

Production increases

Milk production was, and is, still increasing at a rate of 2 to 3 percent over last year, a rate that in any other times would push domestic prices downward. The economy is slowly recovering, but it is not like consumers are lining up to buy cheese, butter, or milk powder. The domestic demand is good, but not stellar.

In fact, fluid milk consumption is noticeably down — somewhere between 2 and 3 percent less than last year.

So where is all this milk finding a home? The answer is: on big ocean ships, heading for foreign lands.

Exports

Currently, about 8 percent of our national milk production is exported. That’s about 15 billion pounds of milk equivalent, or roughly three times Ohio’s annual milk production. If we weren’t exporting all this milk, we’d be back to $10/cwt. milk faster than the Cavaliers can lose another game.

So what happened that, all of a sudden, the world is looking so voracious at buying our dairy products?

World view

First, the drought in part of Russia and Eastern Europe last year has left this country short of dairy feeds. So Russians have to import substantial quantities of butter, a food that apparently they cannot lived without.

Second, the Chinese demand for dairy products is increasing faster than anybody had predicted. This increased in demand is compounded by a fear of their own dairy products, consequence of the melamine-tainted milk scandal that sickened thousands of Chinese infants. So the Chinese are buying large amounts of milk powder.

Third, it rained, and rained, and rained in the dairy milkshed of Australia. Australia exports roughly 50 percent of its milk production. And two-thirds of the milk is produced in the State of Victoria, where it rained more in one year than it had in the prior three years combined.

Australia’s dairy production is predominantly pasture-based. Predictably, Aussies found out that cows don’t do so well when they have to graze with water up to their bellies. So milk production in Australia is down.

Fourth, all the rain that normally finds its way to New Zealand stopped for a vacation in Australia.

So New Zealand, a country producing roughly the same amount of milk as California and exporting over 95 percent of its production, is not producing as much milk as was expected.

So if you are looking for a supplier on the world market, that leaves… well the United States. This is why we are currently exporting 47 percent of our non-fat dry milk production, 58 percent of our dry whey production, 67 percent of our whey protein concentrate production, and 40 percent of our lactose production.

World market

Yet, we are not exporting much of our butter (8 percent) or cheese production (3.5 percent). Our dairy products are still discounted on the world market because they do not match the international specifications (too much moisture in our cheddar cheese, too much salt in our butter, etc.).

So now we know why we are enjoying what are historically very strong milk prices.

We should also understand that we could very well lose much of this new export market for reasons that are as unpredictable as those that lead to our surge of exports.

Trade is good; exports are welcome. But international trading of a thinly traded commodity doesn’t do anything toward stabilizing prices. If anything, this can accentuate the peaks and the valleys. And we are currently sitting on a huge pile of 1 billion pound of cheese in warehouses.

Eventually, reality may be back in a hurry. So plan for tougher times ahead. Of course I can be wrong… again!